No surprise here: The Securities Industry Association (SIA) is fighting is against the FPA's lawsuit seeking to have the SEC jettison a rule that exempts broker-dealers from the Investment Advisers Act of 1940.
The FPA filed the suit in July against the Securities and Exchange Commission, saying it has waited long enough for the SEC to act on the proposed rule, which it considers damaging to both financial advisors and consumers. The FPA notes that the proposal, which it maintains essentially frees brokers from the regulatory burdens faced by RIAs, is in actuality a de facto rule because the SEC has allowed broker-dealers to operate under the exemption pending its official adoption. Since the lawsuit was filed, the SEC has agreed to reopen comment on the rule.
On its Web site, the SIA says brokers and broker-dealers are subject to tougher regulations from the SEC and self-regulatory organizations (the NASD, for example) than those that govern financial advisors under the Investment Advisers Act of 1940.
The FPA has disparaged broker-dealer regulation and filed a suit against the SEC, which properly believes that some brokerage activities are regulated appropriately under the broker-dealer rules, rather than under the investment adviser rules, the SIA says, adding that the FPA's criticism is ill-founded.
The proposed rule granting broker-dealers the exemption to the 1940 act allows them to offer fee-based accounts without having to register as financial advisors, and regulators have viewed that in the best interest of investors because it promotes the use of fee-based accounts, the SIA says. Compensating registered reps based on client assets, regardless of transaction activity, was among the best practices identified in a 1995 report done by the SEC's Committee on Compensation Practices. The report saw fee-based accounts as a means of better aligning the interests of reps and clients.
In November 1999 the commission issued proposed rule 202(a)(11)-1. This proposal states that the form of compensation received by a broker shall not, in and of itself, be determinative of whether an account is advisory or brokerage in nature, the SIA says.
The rule is clearly limited to those situations where the other components of an advisory relationship do not exist, and clearly excludes fee-based accounts where broker discretion exists, the SIA continues. Further, it specifies that a broker must disclose that his or her client has entered into a brokerage relationship. SIA supports stronger disclosure on this point than is provided for in the proposal.
There is no regulatory imperative for imposing Investment Advisers Act requirements in addition to the extensive broker-dealer regulatory framework overseeing brokerage accounts, the SIA says. The SEC should adopt the final rule, it adds, and doing so is in the best interests of investors.